How does your 401k plan dictate beneficiary payouts? Some retirees have chosen to leave their retirement assets sitting in their 401k plans instead of rolling it over to an IRA once they retire. However, most retirees aren’t aware of their former Employers policies and procedures in regards to beneficiary payouts. Some companies may allow the beneficiary account to remain within the plan, most will require a beneficiary to take a “Lump Sum only” option, or be subject to the “5 year payout rule”
With greater efforts for companies to reduce liability in regards to beneficiary MRD issues, it wouldn’t surprise me for most companies to adopt some form of a “Lump Sum only” payout option. Therefore, if you haven’t already rolled over your 401k to an IRA, you and your spouse should consider the future tax implications of leaving it in your 401k plan after retirement.
The beneficiary payout problem with 401k plans is a major issue that most people are not aware of. The problem involves complex tax issues, MRD regulations, employer/company related liability, etc. As you know most employers/companies are always looking to reduce any possibility of their legal liability, therefore, most employers/companies tend to adopt the easiest and least liable option, related to beneficiary payouts. This is the reason many employers have adopted the options of “Lump Sum only” versus the “5 year payout rule”, or allowing the beneficiary to remain within the plan. The “lump sum only” option means if a participate dies while his money is still within the 401k plan, the company could require the beneficiary to take the funds in a full lump sum distribution subject to full taxation. The “5 year rule” option means the beneficiary has a maximum of 5 years to liquidate all assets from the account and pay taxes. However, if the 401k plan was rolled to an IRA instead, the beneficiary could keep the IRA as a spousal or IRA BDA (depending on the actual beneficiary) and only have take minimum required distributions out per year based on the beneficiaries life expectancy. Therefore, rolling your 401k plan to an IRA soon after 59.5 or retirement could save your beneficiary some major tax implications.
Disclaimer: I am Andrew D. Rice, Vice-President of Money Management Services, Inc. a SEC Registered Investment Advisor. This blog post on “Is Your Will Worthless” should NOT be construed as personalized advice. Andrew D Rice, AIF®, CTS™, WMS
Andy graduated from the University of Alabama-Birmingham with a B.S. degree in Accounting. He is a Registered Investment Advisor Representative of Money Management Services, Inc and holds the designations of CPA (Certified Public Accountant), AIF® (Accredited Investment Fiduciary), CTS™ (Certified Tax Specialist), and WMS (Wealth Management Specialist). As an advisor, Andrew specializes in comprehensive financial planning, estate tax planning, personal taxation planning, retirement income distribution planning, wealth accumulation, personalized portfolio management, and fiduciary investment management services.